What can history teach us?
The Next Generation EU (NGEU) funds, agreed upon in July 2021, is a package of funds which, through a combination of grants and loans, aims to support the recovery from the COVID-19 pandemic and foster investments leading to a greener, digital economy. Will this effort be successful?
In this paper, Canova and Pappa, use an equilibrium model of a monetary union featuring endogenous growth and externalities in order to highlight the main transmission channels EU funds have to a typical European region. They look at the impact of older funds such as the European Regional Development Fund (ERDF) launched to foster innovation and research, to favor the digital agenda, and to support small and medium-sized enterprises; and the European Social Fund (ESF), whose aim was to support investments in education and health, and to fight poverty. It should be noted that the NGEU funds combine features of both ERDF and ESF. They find that:
- The macroeconomic effects of the ERDF are less persistent than those of ESF;
- Regional dynamic responses are heterogeneous and country specific features, location, tenure in the EU, and level of development are, in part, responsible for these differences;
- In response to the programs, lower income, peripheral, and newly tenured regions of the EU do not take full advantage of the funds and underperform in terms of recovery and transformation.
What do these findings imply for the success of the NGEU funds?
[The] NGEU funds will not have uniform effects, nor help, in particular, those who currently lag most behind. In these regions the recovery and the transformation process may not happen, even if a larger amount of funds is channeled to them, perhaps because of government inefficiencies, lack of medium term planning, shortage of entrepreneurship, or low average level of education and of skills. Thus, the threat that income polarization and regional inequalities will increase, and the ”recovery and transformation” process will be a multi-gear one is not trivial, unless important social transformations will take place correcting for these distortions.
What are the likely macroeconomic effects of the EU Recovery plan?
Authors: Fabio Canova, Evi Pappa
From: Norwegian Business School, Universidad Carlos III
How to boost the effectiveness of the NGEU funds?
Albrizio and Geli examine the extent to which differences in the level of labor and product market rigidity impact the fiscal multipliers of different countries in the EU. They too look at how the European Regional Development Fund (ERDF) impacted growth in European countries. They find that:
- The regulatory framework at least partly determines the size of the European funds’ fiscal multiplier;
- More flexible labor and product market regulation could continuously increase the size of the multiplier.
An Empirical Analysis of the Determinants that can Boost Next Generation EU’s Effectiveness
Authors: Silvia Albrizio and José Federico Geli
From: Banco de España
